Sovereign bond
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A sovereign bond is a bond issued by a national government denominated in a foreign currency. Bonds issued by national governments in the country's own currency are normally referred to as government bonds.
Nations with very high or unpredictable inflation or with unstable exchange rates often find it uneconomic to issue bonds in their own currencies and so are forced to issue bonds denominated in more stable foreign currencies. This raises the issue of default if the nation cannot afford to repurchase the necessary foreign currency at bond repayment time. The risk of default means that investors require the bonds to be issued paying a higher yield and this, making the debt more expensive to service, makes the risk of default higher! In the event of default, unlike a corporation or even a municipal subdivision, a nation cannot file for bankruptcy. But on the rare occasions that a default occurs, just as in defaults on corporate bonds, recent practice has been that the defaulting borrower presents an exchange offer to its bond holders in an effort to restructure the sovereign debt, as has been the case in US dollar denominated bonds issued by Peru (1996) and Argentina (2001). However, getting the bond holders to accept an exchange offer has become very difficult, something caused by the holdout problem.
During the early 1980s, the sovereign bonds of developing nations were a popular investment for Western banks. These created many problems when some nations found it difficult to repay those bonds.
